Corruption in Ukraine: Behind and Beyond the Orange Revolution

Vladimir Dubrovskiy

CASE Ukraine

www.case-ukraine.kiev.ua

CASE Ukraine

The 2004 Transparency International Corruption

114.

Rep. of Congo 2.3

Perceptions Index

122.

Ethiopia Honduras Moldova Sierra Leone Uzbekistan Venezuela Zimbabwe Bolivia Guatemala Kazakhstan Kyrgyzstan Niger Sudan 2.3

2.3

2.3

2.3

2.3

2.3

2.3

2.2

2.2

2.2

2.2

2.2

2.2

128

129.

Ukraine

Cameroon Iraq

2.2

2.1

2.1

Out of 147 countries Kenya Pakistan 2.1

2.1

http://www.infoplease.com/ipa/A0781359.html

CASE Ukraine

Control of Corruption (2004), Point Estimate

160 Liberia 161 Moldova 162 Niger 163 Pakistan 164 Sierra leone 165 Kenya

166 Ukraine

167 Indonesia 168 Papua new guinea 169 Belarus 170 Georgia 171 Libya 172 Kyrgyz republic 173 Togo 174 Djibouti 175 Venezuela -0.86

-0.86

-0.87

-0.87

-0.88

-0.89

-0.89

-0.90

-0.90

-0.91

-0.91

-0.91

-0.92

-0.92

-0.94

-0.94

Out of 204 countries

Governance Matters IV: Governance Indicators for 1996-2004

Daniel Kaufmann, Aart Kraay, and Massimo Mastruzzi The World Bank, May 2005

CASE Ukraine

Petty corruption: medicine, education, traffic enforcement ….

Just increase the salaries and improve the control Embezzlement and abuses of procurement Improve the transparency and control Corruption in state-business relations

Extortion Hellman, 1998 Bribing Collusion Karklins, 2002

“State Capture” by Corrupt Networks

CASE Ukraine

Is it the “bribe tax” that makes a difference?

Revenues typically paid to officials to "get things done" (% of sales) Lithuania Slovenia Poland Russia Slovakia China Bulgaria Pakistan Kazakhstan Ukraine Bangladesh Romania Kyrgyzstan Cambodia 0.00

1.00

2.00

3.00

Investment Climate Assessments survey. IFC, 2002 4.00

5.00

6.00

“Business Environment in Ukraine”. IFC, Septamber, 2003 CASE Ukraine

Corruption is perceived as a serious impediment for doing business…

CASE Ukraine

… while the other impediments are connected to it

“Business Environment in Ukraine”. IFC, December, 2004

CASE Ukraine

Institutional legacy (following North; Putnam)

Karamsin, 19th century Russian historian

Institutional memory of the former empire:

“The severity of the Russian laws is alleviated

only

by

discretion

in their enforcement” “… just this disorder makes life in Russia possible” Gertzen, 19th century Russian social thinker Legislation is designed (intentionally?) in such a way that almost EVERYONE must become a lawbreaker

Discretion

is the only resort from such a “total guilt”

Every business is subject to the authorities’ arbitrary, discretionary power

CASE Ukraine

Corruption is embedded into the structure of post-Soviet society

Forced modernization, especially the Communist regime: Legislation violates the natural law Normal economic activities are considered illegal 1998 Reputation-based informal networks of interpersonal mutual exchange with “favors of access” (

blat

) Emerge to facilitate the illegal transactions of all kinds Litwak, 1991 (!) Weak rule of law

BUT “One has to deserve a

right

to pay a bribe”

INTEREST

Corruption

CASE Ukraine

INTEREST FACILITATES Legislation (flawed, ambiguous, impracticable) ENHANCES

Discretion

Decreasing the demand for improvements

Officials: not a bureaucracy

Bureaucracy (Weber) Administrative power in Ukraine

Highly-paid professional public servants facilitating rational processes of control. Implements legislation in a strictly formal (

impersonal

) way Poorly-paid and dependent upon administrative rents (in money or barter) Relies upon

discretionary

power and vague and arbitrary informal rules Operates under constant public scrutiny and political oversight Controls politicians rather than vice versa. Tries to control mass-media to avoid public scrutiny No decision-making power Clear separation of “powers” from branches of State Possesses the political power to magnify ambiguity and non transparency in legislation

Strictly controlled and separated from business Un controlled and mostly affiliated with business

CASE Ukraine

Consequences

Inhibited business selection through the entry and exit Suppressed entrepreneurship and FDI Poor governance Distorted political representation Misuse and misallocation of resources

High social cost

“Business Environment in Ukraine”. IFC, December, 2004 CASE Ukraine

Whither “captured state”: a dead end?

Business: a “Milk caw” or

Residual rights of control

Administrative power: a “Rent pump” for officials

Sources of rent; permissions

Provides protection and patronage for business

Perceived totally rent seeking Perceived totally corrupted

Public: a passive player

CASE Ukraine

As a result of the revolution:

Public is not passive any more Authorities are committed to fight corruption seriously Executive power officials have lesser impact on the legislature Political market emerges

BUT

Societal structures are persistent Legislation did not change significantly

Further closing of corrupt networks

Thanks for your attention!